A company reports accounting data in its financial statements. This data is used for financial analyses that provide insights into a companys strengths, weaknesses, performance in specific areas, and trends in performance. These analyses are often used to compare a companys performance to that of its competitors, or to its past or expected future performance. Such insight helps managers and analysts improve their decision making.

Consider the following scenario:

Your boss asked you to analyze Green Hamster Manufacturings performance for the past three years and prepare a report that includes a benchmarking of the companys performance. Using the companys last three years of financial reports, youve calculated its financial ratios, including the ratios of Green Hamster Manufacturings competitionthat is, comparable ratios of other participants in the industryand submitted the report.

Along with calculating the ratios, what else is needed for your report?

Both of the above

Making observations and identifying trends that are suggested by the ratio analysis

Identifying the factors that drive the trends in the ratios

There are several groups of ratios most decision makers and analysts use to examine different aspects of a companys performance. Based on the descriptions of ratios listed, identify the relevant category of ratios.

	Ratios that help determine whether a company can access its cash and pay its short-term obligations are called ratios.
	Ratios that help determine the efficiency with which a company manages its day-to-day tasks and assets are called ratios.
	Ratios that help assess a companys ability to service the interest and repayment obligations on its long-term debt and the degree to which it uses borrowed versus invested financial capital are called ratios.
	ratios help measure a companys ability to generate income and profits based on its invested capital.
	ratios examine the market value of a companys share price, its profits and cash dividends, and the book value of the firms assets and relate them to other data items to determine how the firm is perceived in the stock market.

Ratio analysis is an important component of evaluating company performance. It can provide great insights into how a company matches up against itself over time and against other players within the industry.

However, like many tools and techniques, ratio analysis has a few limitations and weaknesses.

Which of the following statements represent a weakness or limitation of ratio analysis? Check all that apply.

Different firms may use different accounting practices.

A firm may operate in multiple industries.

A firms financial statements show only one period of financial data.